How do I save on taxes with mutual funds ?

Paying a lot of taxes? Contemplating on how you could save more money? If so, you’re at the right place.

Roughly 2% of the Indians pay income tax because 95% of the households earn an income of less than 2.5 Lakhs annually. We should for a moment take pride in the fact that we pay taxes that contribute towards building the nation.

While paying taxes is one of the ways to contribute towards the growth of the country, the government of India also provides for its citizens alternative ways to do so incidentally while saving one’s income from income tax. So let’s get started!

First, it is important to assess whether you come under the existing taxable bracket provided by the finance ministry.

Income Tax Slab Rates for FY 2017-18 (AY 2018-19)

Educational CESS

Income tax

0%

Annual Income (Rs.)

Upto 2,50,000

Income tax

2%

Annual Income (Rs.)

Rs. 2,50,001 - Rs. 5,00,000

Rs. 5,00,001 - Rs. 10,00,000

Above Rs. 10,00,000

Secondary and Higher Education CESS

Income tax

0%

Annual Income (Rs.)

Upto 2,50,000

Income tax

1%

Annual Income (Rs.)

Rs. 2,50,001 - Rs. 5,00,000

Rs. 5,00,001 - Rs. 10,00,000

Above Rs. 10,00,000

If you do not come under these tax slabs then you probably do not have to worry about paying income tax, but if you do then it’s a good idea to acquaint yourself with section 80C.

Salient Features of Section 80C:

1. Section 80C is one of the various sections that are eligible for income tax deductions under Chapter VI-A of the Income Tax Act; it is also the most popular section that is commonly used by salaried employees to save taxes on their incomes.

2. In a particular financial year, Section 80C allows a tax payer to deduct a maximum of Rs. 1,50,000 from his or her total taxable income.

3. Both individual tax payers and HUF can claim deductions under this section.

By investing in the financial instruments listed above one is eligible to save up to 1,50,000 rupees in taxes every year. But with so many choices available how does one choose? Let us look at the table below for a quick comparison.

Investment Type

Lock In period

Assured Return

Returns Expected

Is Return Taxable?

Tax Saving Mutual Funds

3 Years

Equity Market Related

12-16%

No

EPF

5 Years;
Exceptions
Prevail

No

8.65%

No

Life Insurance

5 Years

Yes

0.6%

No

5 Year tax Saving FD

5 Years

Yes

6-7.2%

Interest Component is Taxable

NSC

5 Years

Yes

7.80%

Interest Component is Taxable

ULIP

5 Years

Equity Market Related

8-10%

No

SCSS

5 Years

Yes

8.30%

Interest Component is Taxable

PPF

15 Years

Yes

7.80%

No

Sukanya
Samriddhi
Yojana

21 Years

Yes

8.30%

No

NPS

Until Retirement

Equity Market Related

8-10%

Yes

From the table, if you do not want to have your money locked up for 5, 10 or 20 years in
order to save taxes, tax saving mutual funds may be your best bet!
They not only have the shortest lock-in period vis-á- vis other options but also boast of
impressive returns.

Tax saving mutual funds essentially invest at least 65% of the investors wealth in equities.
This implies that the returns an investor makes are linked to the performance of the equity
market. While markets may be volatile in the short run, we know that historically tax saving
mutual funds can be extremely rewarding in the long run (over a period of 3 years) and have
the potential to generate terrific returns that can easily surpass inflation.

With no upper limit on tax saving mutual funds, individuals can invest as much as they want
and for a substantial period, if long-term wealth creation is one of their primary goals. Even
if one is cash-strapped at the moment, he or she can start off with an investment amount as
low as Rs.1000. Investments can be made on a monthly basis in the form of a Systematic
Investment Plan or SIP to benefit from rupee cost averaging & overcoming short term
volatility. Tax saving mutual funds are classified as Triple E (Exempt - Exempt - Exempt). This
implies that the principle amount, dividends payed out & the accumulated returns are
completely tax-free, provided the investments are held for at least a year. For today’s
working professionals who seek lucrative investment instruments that do not burden them
with lengthy lock-in periods investing in tax saving mutual funds may be an ideal choice. At
Rightfunds we offer carefully handpicked schemes that have provided investors with
superior returns over a prolonged period of time. Sign up today and begin investing!

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